A few years ago, we warned that lenders, particularly GSEs like Fannie Mae and Freddie Mac, would take punitive measures on people who made strategic defaults on their homes, and it looks like that’s where things are heading. Fannie Mae has announced that borrowers who default despite ability to pay and don’t seek modifications will be barred from getting a new Fannie Mae-backed loan for seven years. The House has also passed a measure that requires HUD to “rein in strategic defaults” on FHA loans by defining “strategic default” and encourage lenders to block potential borrowers who have strategically defaulted from getting another FHA mortgage. The measure was as part of legislation that would nearly triple the cap on annual premiums the Federal Housing Authority can charge borrowers and would give the agency more powers to protect itself from fraudulent or poorly underwritten loans.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., and regular Shelterforce contributor, who recently wrote a piece on giving homeowners in unwanted mortgage default the right to rent, was critical of the Republican-sponsored measure, writing on Talking Points Memo that it will “punish homeowners who look out for their own best interest and strategically default . . . Maybe they will also prohibit strategic defaulters from getting a loan through the Small Business Administration or allowing their children to get a government guaranteed student loan.”
Strategic default, he notes, is standard business practice. Look no further than New York City’s Cooper Village and Stuyvesant Town — the massive housing complex whose owner strategically defaulted on the $4.4 billion debt used to help finance the deal.
Heck, even Bank of America’s credit loss mitigation executive, Jack Schakett, acknowledged on a conference call with reporters as the company announced its Principal Reduction Enhancement program, that there is “a huge incentive to walk away” and that “foreclosure can be very appealing to customers.”